ALCON LABORATORIES (INDIA0 PVT LTD,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

These two appeals by the assessee is directed against different assessment orders passed u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] for the assessment years 2013-14 & 2014-15 respectively. Since the issues in the appeals are common in nature in both the assessment years i.e. 2013-14 & 2014-15, these are clubbed together, heard together and disposed of by this common order for the sake of convenience.

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 2 of 49 2. The first ground for consideration is relating to adjustment on account of alleged excessive AMP expenditure. On this issue the assessee has raised following grounds:-

“Grounds relating to adjustment on account of alleged excessive AMP expenditure 3. The learned AO / TPO and the learned DRP have erred, in law and in facts. by concluding that the Appellant has incurred excessive or extraordinary AMP expenses attributable to the Development, Enhancement, Maintenance, Protection and Exploitation ('DEMPE') of marketing intangibles owned by the AE and that such expenditure is a separate international transaction of provision of service. without appreciating that the Assessee operates as a Limited Risk Distributor ('LRD'): 4. Without prejudice to the above ground. the learned AO / TPO and the learned DRP have erred, in law and in facts, by failing to accept the aggregation approach adopted by the Appellant and not appreciating that the sales and distribution expenditure incurred by the Appellant is included in the Profit Level Indicator ('PLI') used for the distribution activity, which is tested under the Transactional Net Margin Method ('TNMM'): the arm's length benchmarking and the comparable companies so adopted are not disputed by the learned TPO: 5. The learned DRP has erred, in facts, by concluding that the commission paid to M/s Parekh Integrated Services Private Limited forms part of the AMP expenses by placing reliance on the DRP directions of AY 2012-13. which states that, "the taxpayer may have to provide required incentives to M/s Parekh Integrated Solutions Limited to distribute its product. than that of competitors". 6. The learned DRP. erred in law and in facts. by following the DRP directions of AY 2012-13 and arbitrarily considering 25% of the distributor's commission as incurred towards warehousing facilities and treating the balance as part of AMP expenditure:

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 3 of 49 8. Without prejudice to the above grounds, the learned AO / TPO and the learned DRP have erred, in law and in facts, in treating the sales and distribution expenses incurred as a separate international transaction to benchmark it independently from distribution activity, as in the absence of any computation mechanism prescribed under the Act, the machinery provision fails; 9. Without prejudice to the above grounds, the learned AO / TPO and the learned DRP have erred, in law and in facts, by alleging that the Appellant has not been compensated for the sales and distribution expenditure incurred: 10. Without prejudice to the above grounds, the learned AO / TPO and the learned DRP have erred, in law and in facts, by erroneously computing the compensation for the alleged DEMPE function performed-by the Appellant for computing the transfer pricing adjustment.”

2.1 Facts of the issue are that the TPO has discussed in detail in para 9 of his order that AMP is an international transaction. He has also discussed that when the Indian subsidiary is discharging both the distribution and marketing functions, then both the functions need to be benchmarked separately. He has discussed in detail the various clauses of the "Distribution and Marketing Services" agreement with its AE w.e.f. 01/04/2006 to conclude that it is obligatory for the assessee (distributor) to undertake marketing activities on behalf of supplier (its AE). He has also referred that it is operating under the direct supervision and control of its AE. As the assessee has not benchmarked this marketing function, the TPO has benchmarked this transaction separately to determine the ALP of this international transaction. Therefore, the TPO has rightly concluded that the assessee has incurred excessive or non-routine AMP expenditure attributable to DEMPE of marketing intangibles owned by the AE and that such expenditure is a separate international transaction of provision of service.

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

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2.2 Further, the TPO has discussed in para 9.4 of his order that the assessee has not been compensated for the sales and distribution expenditure incurred. It is seen that the TPO has proved that the assessee has incurred far more expenses when it was compared to the companies involved in similar activity. He has mentioned that the assessee has spent substantial portion of money on brand awareness activities. He concluded that this has enhanced the brand image in India. The fact remains that the brand is owned by its AE and hence, the AE has certainly benefitted by the expenses incurred by the assessee. However, the assessee has not been compensated for this. Ld. DRP was in agreement with the arguments of the TPO and found no reason to interfere with the order of the TPO on this ground.

2.3 Finally, the Ld. DRP followed the earlier order of Ld. DRP in assessment year 2012-13 and observed as under:-

"Having considered the submissions, (For above 4 grounds), it is observed from the perusal of the TP order (in paragraphs 6 to 11) that the TPO has examined the issues raised above and recorded a detailed reasoning before making an adjustment on AMP expenditure. While deciding the issue, the TPO has discussed and considered the submissions made by the assessee. Before the DRP, the assessee has made similar submissions. We are in complete agreement with the conclusions drawn in para 10.8 of the TP order. However, considering the submissions of the assessee that routine expenditure has beer? treated as AMP by the TPO, we have sought Remand Report (RR) from the TPO after giving an opportunity to the assessee. After giving an opportunity to the assessee, the TPO submitted RR dated 06.12.2016; the relevant extract is reproduced below:

"5. The TPO is of the view that there may be different forms of distribution channels adopted by tax payers wherein some companies may adopt direct selling of products to end customers (or) some companies may use retails chains to distribute end products to consumers. In the taxpayer's case, it has adopted the consignment model to distribute its products. Further, as per the website of M/s

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 5 of 49 Parekh Integrated Solutions Ltd, it offers consignment services to various companies. This being the case, the taxpayer may have to provide required incentives to M/s Parekh Integrated Solutions Ltd to distribute its products, then that of its competitor's products. 6. Further, the warehousing & logistics function provided by M/s Parekh Integrated Solutions Ltd, does not result in any value addition of the taxpayer's products. On the other hand, facilities such cold storage/warehousing etc. are essentially required to maintain the composition of taxpayer's products, which are to be distributed. Therefore, such functions/Services are only incidental to the distribution function undertaken by M/s Parekh Integrated Solutions Ltd, for/on behalf of the taxpayer. Hence, the TPO has rightly considered the distribution commission paid as part of AMP expenses and therefore, it is requested that the Hon'ble DRP may kindly affirm the TPO's order." Considering the facts and circumstances of the case, and also considering the submissions of the assessee, we are of the view that the TPO for the detailed reasoning given therein is justified in his approach to make an adjustment on AMP. However, in respect of ground No 2, relating to distributors' commission, we are of the view that the cost relating to provision of warehousing, particularly the cold storage being provided by the distributors, needs to be excluded from the AMP. As per the Consignment Agency Agreement (CAG) entered by the assessee with M/s Parekh Integrated Services Pvt Ltd, Consignment Agent (CA), responsibility is cast on the CA by Clause 11 (a) to provide: (a) The CA shall provide work space equivalent to 500 square feet at the zonal offices and 300 square feet at other locations including two cabins for the zonal mangers of Alcon at the Zonal offices. It is agreed between the Parties that the area of the above work space(s) may be increased or decreased by Alcon as ....The work space provided at the zonal offices and other locations shall include telephone facilities and other accessories of an office premises including but not limited to chairs, tables. CA shall also provide table space with telephone facility for each of Alcon's Area Managers when visiting the CA's warehouses. The assessee is having distribution activities in 38 locations across India as per the submissions made by the assessee vide letter dated 25.01.2016. Further, the Warehousing charge is in- built in the distributor's commission and accordingly, we are of the view that an estimated cost of 25% of distributors' commission could be treated as towards the cost relating to provision of warehousing facility, which may be excluded for AMP purposes. Accordingly, we direct the AO to reduce 25% of the distributors' commission from the AMP. "

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

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2.4 Consistent with the view taken by the Ld. DRP for 2012-13, Ld. DRP directed the AO to reduce 25% of the distributors' commission from the AMP. Against this assessee is in appeal before us.

“9.1 The Ld.AR submitted that, the assessee purchases ophthalmic pharmaceuticals and ophthalmic surgical products from its AE is for distribution in India. It was submitted that assessee also renders services in relation to the products during and after warranty period. The Ld.AR submitted that, on one hand the revenue accepts the distribution activities and marketing activities carried on by assessee to be at arm’s length whereas on the other hand while making the AMP expenditure the Ld. TPO holds that the selling and distribution expenses incurred by assessee promotes the intangibles of AE in India and the distribution expenses incurred being towards the products amounts to advertisement. 9.2 The Ld.AR submitted that, the Ld. TPO did not consider that the sales promotion expenses and the seminars and conventions carried on ease to educate the Indian market in respect of the products distributor by the assessee within the Indian territory he submitted that by these expenditures the assessee is promoting its own business in India as a distributor. The details of the expenditure are as under:

Turnover 5,24,73,00,000

Distributor's Commission 36,80,00,000 Seminars & Conventions 14,87,00,000 Sales Promotion 7,97,00,000 Total AMP 59,64,00,000

Alcon India's AMP to Sales 11.37%

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 7 of 49 9.3 The Ld.AR submitted that, the revenue made adverse observation that assessee incurred excessive sales and distribution expenses and compared to the comparable companies by using CUP as the most appropriate method. He submitted that the revenue has attributed excessive sales and distribution expenditure to the additional function of promoting and developing the marketing intangibles of the AE by assessee in India by using bright line test. It is the submission of the Ld.AR that, this is not a recognised method under the trans-uprising regulation.

9.4 The Ld.AR submitted that, there is no agreement between the assessee and the AE to make such expenditure in order to promote the intangibles of the AE in India. And in the absence of any specific requirement to make such expenditure on behalf of AE, the expenditures incurred by assessee cannot be treated to be an international transaction. In support, he placed reliance on the decision of Hon’ble Delhi High Court in case of Maruti Suzuki India Ltd. vs. CIT, reported in 381 ITR 117 and M/s. Sony Ericsson Mobile Communications Pvt. Ltd. vs CIT reported in 374 ITR 118.

9.5 On the contrary the Ld. CIT.DR placed reliance on orders passed by authorities below. 9.6 We have perused submissions advanced by both sides in light of records placed before us.

9.7 We know that the DRP refused to follow the above decisions of Hon’ble Delhi High Court by observing that these decisions have not been accepted by the Department and SLP has been filed before Hon’ble Supreme Court.

9.8 It is not the case of the revenue that assessee is mandated to incur such expenditure as per any agreement between the assessee and a. It is also not disputed that these expenditures incurred by assessee or towards its own business promotion in India as assessee is a distributor further from the transfer pricing study report we note that assessee operates in limited risk environment in respect of the distribution and marketing segment. As per the TP study the description of activities carried on by the assessee that has been allegedly characterised by the Ld. TPO towards the promotion of brand are as under:

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

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Nature of sales and Sl. No. Brief description distribution expenditure Comprises of commission paid to the third party distributor of ophthalmic surgical and ophthalmic pharmaceutical products on the basis of sales effected by them. The amount of Distributor's 1. commission includes commission consideration for various services provided by consignment agents to Alcon India like warehouse charges, collection charges, charges for distribution activities in 38 locations across India. This predominantly comprises of Sales 2. education grants paid to hospitals and promotion institutions Comprises of cost incurred on sponsorship Seminar and towards All India Ophthalmic Society 3. convections Conference, All State level Conferences, performing live surgeries and all other 9.9 On an identical situation, Coordinate Bench of this Tribunal in case of Essilor India Pvt. Ltd vs DCIT in IT(TP)A No 29/Bang/2014 and IT(TP)A No. 227/Bang/2015 observed and held as under: “12. We have heard the submissions of the learned counsel for the assessee as well as the ld. DR. The first aspect which was brought tour notice by the ld. counsel for the assessee is the decision of the ITAT in assessee's own case for assessment year 2009-10 and 2010-11 on the same issue of AMP expenses. The Tribunal took the following view after extracting the decision of the Hon'ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd. (supra). "21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee - company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also ensure to its foreign AE is not sufficient to infer existence of international trans action. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 9 of 49 between the assessee-company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act.

22.Applying the above legal position to the facts of the present case, it is not a case of revenue that there existed an arrangement and agreement between the assessee-company and its foreign AE to incur AMP expenditure to promote brand value of its products on behalf of the foreign AE, merely because the assessee-company incurred more expenditure on AMP compared to the expenditure incurred by comparable companies, it cannot be inferred that there existed international transaction between assessee-company and its foreign AE. Therefore, the question of determination of ALP on such transaction does not arise. However, the transaction of expenditure on AMP should 'co treated as a part of aggregate of bundle of transactions on which TNMM should be applied in order to determine the ALP of its transactions with its AE. In other words, the transaction of expenditure on AMP cannot be treated as a separate transaction. In the present case, we find from the TP study that the operating profit cost to the total operating cost was adopted as Profit Level Indicator which means that the AMP expenditure was not considered as a part of the operating cost. This goes to show that the AMP expenditure was not subsumed in the operating profitability of the assessee-company. Therefore, in order to determine the ALP of international transaction with its AE, it is sine qua non that the AMP expenditure should be considered a part of the operating cost Therefore, we restore the issue of determination of ALP, on the above lines, to the file of the AO/TPO. The grounds of appeal raised by the assessee-company on this issue are partly allowed."

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

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"In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on September 16, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in the impugned judgment dated July 1, 2010.

The Transfer Pricing Officer will decide this matter on or before December 31, 2010. The civil appeal is, accordingly, disposed of with no order as to costs." 17. The Hon'ble Delhi High Court in an other case of Maruti Suzuki India Ltd. Vs. CIT 381 ITR 117 (Delhi) held that the fact that the benefit of such AMP expenses would also ensure to the AE is itself insufficient to infer the existence of an international transaction. Similar decision was also rendered by the Hon'ble Delhi High Court in the case of CIT (LTU) v. Whirlpool of India Ltd., 381 ITR 154. The bright line test which was applied by the AO in the present case was also applied by the AO in the aforesaid cases. The bright line test which was accepted by the Special Bench of ITAT in the case of L.G. Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 (Del)(SB) was held by the Hon'ble Delhi High Court to be not correct. In the case of Maruti Suzuki (supra), the facts were Maruti Suzuki India Ltd. (MSIL) was engaged in the manufacture of passenger cars in India. It was a subsidiary of SMC, a Japanese company. MSIL started its business in 1982 as a Government of India owned company. SMC was selected as the business partner independently by MSIL. The co-branded trade mark "Maruti-Suzuki" was used since the inception of MSIL. A licence agreement was entered into between MSIL and SMC in October 1982 for its models M-800, Omni and Gypsy. By the agreement, MSIL was permitted to use the co-branded trade mark "Maruti- Suzuki" on the vehicles. In the assessment of MSIL for assessment year 2005-06, the AO invoked the provisions of section 92CA(1) of the Act and referred the case to the Transfer Pricing Officer for determination of the arm's length price in relation to the international transactions undertaken by MSIL with its associated enterprise, SMC. The Transfer Pricing Officer passed an order making an adjustment of Rs. 154.12 crores towards the advertisement, marketing and sales promotion expenses imputing a notional arm's length compensation towards the advertisement, marketing and sales promotion expenses incurred by MSIL for SMC. On the above facts, the Hon'ble Delhi High Court held as follows:

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

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".... when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This co- brand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that permission was granted by SMC to MSIL to use the co- brand "Maruti Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bore the symbol "S" was not decisive as the advertisements were of a particular model of the car with the logo "Maruti- Suzuki". The Revenue had been unable to contradict the submission of MSIL that the co-brand mark "Maruti-Suzuki" in fact did not belong to SMC and could not be used by SMC either in India or anywhere else. The decision in the case of Sony Ericsson requires that the mark or brand should belong to the foreign associated enterprise. The Revenue also did not deny that as far as the brand "Suzuki" was concerned its legal ownership vested with the foreign associated enterprise, i.e., SMC. Moreover as MSIL was concerned, its operating profit margin was 11.19 per cent. which was higher than that of the comparable companies whose profit margin was 4.04 per cent. Therefore, applying the transactional net margin method it must be stated that there was no question of a transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure. The advertisement, marketing and sales promotion expenses incurred by MSIL could not be treated and categorised as an international transaction under section 92B of the Act." 18. In the case of Whirlpool of India Ltd. (supra), it was held that there had to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. The transfer pricing adjustment was not expected to be made by deducing from the difference between the excessive advertising, marketing and sales promotion expenditure incurred by the assessee and the advertising, marketing and sales promotion expenditure of a comparable entity that an international transaction existed and then proceeding to make the adjustment of the difference in order to determine the value of such advertising, marketing and sales promotion expenditure incurred for the associated enterprise. Thus, the bright line test had been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm's length price of such transaction. Although under section 92B read with section 92F(v), an international transaction could include an arrangement, understanding or action in concert, this

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 12 of 49 could not be a matter of inference. There had to be some tangible evidence on record to show that two parties had acted in concert. It was also held that the provisions under Chapter X envisaged a separate entity concept. In other words, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales pro- motion expenses."

3.1 In view of the above order of the Tribunal, taking a consistent view, we allow these grounds taken by the assessee in both the appeals for the assessment years 2013-14 & 2014-15.

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 13 of 49 4. Next common ground is with regard to disallowance of Seminars, Conventions and sales promotion expenses. The relevant grounds in assessment year 2013-14 are reproduced below:-

Grounds relating to disallowance of seminars and conventions and sales promotion expenses 11. The learned AO/ DRP has erred. in law and on facts, in disallowing an amount of Rs. 9.57.25.000 in respect of seminar and convention and sales promotion expenses without appreciating the fact that the same is incurred wholly and exclusively for the purpose of business: 12. The learned AO/ DRP has erred. in law and on facts. in applying the CBDT Circular No. 5/2012 (“CBDT Circular') dated 1 August 2012 without considering the fact that there has been no violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ("IMC Regulations") or the regulations issued by Medical Council of India; 13. The learned AO/ DRP has erred, in law and on facts, in applying the CBDT Circular without appreciating that the IMC Regulations are only applicable to medical practitioners and shall not extend to pharmaceutical and allied healthcare companies; 14. Without prejudice to the grounds 11 to 13, the learned AO/ DRP has erred in law by retrospectively applying the CBDT Circular to the subject AY without considering the fact that the CBDT Circular is effective only from 1 August 2012 and hence applicable prospectively from 1 August 2012; 15, Without prejudice to the above grounds i.e. 11 to 14, the learned AO/ DRP has erred, in law and on facts, in disallowing on an ad hoc rate of 50% of seminar and convention expenses and 25% of sales promotion expenses:

4.1 Facts of the case are that the assessee company was asked to explain vide notice u/s 142(1) of the Act dated 21.12.2016

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

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as to why the expenses incurred related to doctors in the form of seminars and conventions and sales promotion should not be disallowed. The assessee company vide submissions dated 23-12-2016 has stated as under; “i. So that sales and profitability of the assessee company increases which clearly reflect that these are illegal gratification which are prohibited by law. ii. The CBDT brought a Circular No. 5 of 2012 dated 1-8-2012 which is clarificatory and clarifies that any expenses incurred in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, .2002 shall be inadmissible under section 3701) being an expense prohibited by the law. The law as stood during relevant previous year as per provisions of section 37(1) read with explanation inserted by Finance Act, 1998 with effect from 1-4-1962 clearly stipulates that if an expenditure is incurred for any purpose which is an offence or which is prohibited under law shall not be allowed as deduction due to restriction contained under section 37(1) read with explanation. The said circular dated 1-8-2012 issued by the CBDT was subject to challenge in writ petition filed in Himachal Pradesh High Court' in the case of Confederation of Pharmaceutical Industry v. CBDT writ petition No. 10793 of 2012- J wherein validity of ,the said CBDT circular was challenged, the Himachal Pradesh High Court held that the said circular is valid and the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 governing professional ethics of Doctors issued is salutary which is in the interest of public and patient. The Punjab and Haryana High Court has vide decision in C.(T vs. M/s. Kap Scan and Diagnostic Centre (P.) Ltd. [2012] 25

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

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taxmann.com 92/344 ITR 476 has confirmed disallowance of commission as not allowable under section 37(1) being against public policy prohibited by law. Based on factual matrix of the case as emerging from the records, the expenses incurred by the assessee company were in the form of seminar and conventions which bears the cost of doctors to undertake foreign tours in the guise of seminars and conferences and sales promotion expenses which includes various facilities provided by the company to doctors. These expenses are directly hit by Explanation to section 37 of the Act. It is well accepted and settled proposition that regulations iii. are covered under the definition of 'law'. The definition in General Clauses Act, 1897 defines 'Indian law' under section 3(29) to mean any Act, Ordinance, Regulation, rule, order, bye- law or other instrument which before the commencement of the Constitution had the force of law in any Province of India or part thereof, or thereafter has the force of law in any Part A State or Part C State or Part thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made under such Act. Similarly, under Constitution of India the word 'law' in context of fundamental rights is defined under article 13(3)(a) and includes any ordinance, order, byelaw, rule, regulation, notification, custom or usage having in the territory of India the force of law.

Thus, the Indian Medical Council (Professional conduct, iv. Etiquette and Ethics) Regulations, 2002 has force of law as it was promulgated in exercise of the powers conferred under section 20A read with section 33(m) of the Indian Medical Council Act, 1956 (102 of 1956), the Medical Council of India,

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with the previous approval of the Central Government, made the regulations relating to the Professional Conduct, Etiquette and Ethics for registered medical practitioners, namely ,the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 and hence these regulations shall be covered under the definition of 'law' and hence is covered under explanation to section 37. For claiming the expenses under section 37 which is a residuary section, it is essential that the expenses are not covered under clauses of sections 30 to 36 and are incurred wholly and exclusive for the purposes of business and it is not sufficient that it has some connection with the business of the assessee. The ld. AO placed reliance on the decision of Tribunal v. Mumbai in the case of ACIT vs. M/s. Liva Healthcare Ltd dated September 12, 2016, [2016] 181 TTJ 433 (Mumbai - Trib.).

4.2 Since the assessee company has not produced the exact amount spent in relation doctors in the form of seminars and conventions and sales promotion expenses. Therefore, 50% of Seminars and conventions amounting to Rs.796 Lakhs and 25 % of sales promotions amounting to Rs.161.25 Lakhs are disallowed by the Ld. AO under section 37 of the IT Act. Similar is the facts in assessment year 2014-15 and only change in amount of disallowance.

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 17 of 49 14. During the relevant financial year, the assessee had incurred the following expenditure:-

Particulars Amount (Rs.) Cost of samples distributed 3,71,20,122 Travel and conveyance provided to 11,04,735 Doctors Gifts and donation provided to 1,11,39,591 Doctors which includes the following expenses- -Publicity and literature amounting to Rs.22,19,263 - Conference and symposium amounting to Rs.50,94,395 - Other marketing expenses amounting to Rs.38,25,933. Total 4,93,64,448

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 18 of 49 Disallowance was made under section 37 of the Act on a mistaken notion / presumption without verification of same in context of MCI regulations. In this context. to understand the issue involved. it is pertinent to note that the Hon'ble Courts before decision of Hon'ble Supreme Court in case of M/s Apex Laboratories Pvt. Ltd. v. DCIT (SLP No. 2320712019)) held that MCI Regulations are not applicable on Pharmaceutical companies and the expenses incurred by such companies are not violative of CBDT circular. During this phase assessments were on adhoc summary basis and critical evaluation of expenditure was not carried out in present appellant's case also. After decision of Hon'ble Supreme Court it has become necessary to critically evaluate each of the expenditure to see if disallowance is justified.

Without prejudice to above. during the course of assessment proceedings for assessment year 2016-17. AO specifically raised a query in relation to expenses incurred on doctors (notice enclosed as Annexure 6 to application for admission of additional evidences @ Pg 65-67) and Appellant filed details/ information in response to such notice/query (submission enclosed as Annexure 6 to application for admission of additional evidences @ Pg 69-77). It may kindly be appreciated that the assessing officer after analysing the nature of expenses (similar to expenses incurred in assessment year 2010-11) in the context of MCI guidelines and the CBDT Circular 05/2012 dated 01.08.2012 accepted the claim of the assessee and did not make any disallowance in the assessment order (enclosed as Annexure 7 to application for admission of additional evidences @ Pg 78-86). This is because even if criteria as laid down in CBDT circular as also MCI regulation (as now affirmed in decision by Hon'ble Supreme Court) is applied. expenditure incurred towards contractual obligation with doctors and employee doctors of pharma companies does not call for disallowance. It is pertinent to point out that the Hon'ble Supreme Court in case of M/s Apex Laboratories (which is otherwise distinguishable on facts) has ultimately upheld the validity of the CBDT circular which was considered by the assessing officer while concluding assessment proceedings for assessment year 2016-17. Even otherwise, the decision of Hon'ble Supreme Court in the case of Apex Laboratories is distinguishable on facts (as highlighted in the subsequent paras) which needs to be analysed/examined by the assessing officer. In the present case. it is reiterated that the assessing officer has failed to examine the nature of expenses incurred by the assessee and has proceeded to disallow the same on conjecture and surmises. Thus in

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 19 of 49 larger interest of justice and to ensure that disallowance is only in accordance with law. it becomes necessary to examine the exact nature of the expenditure from all these angles discussed hereinabove. To facilitate the same. additional evidences are being placed by way of details/documents on sample basis. We crave leave to file more complete details/documents before AO if the verification aspect is set aside/ remanded to Ld. AO. Accordingly, it is respectfully prayed that the issue may kindly be remanded and AO may kindly be directed to verify/examine such details/documents for all the above aspects. Detailed submission justifying each expense incurred by the Appellant not being violative of MCI Regulations and CBOT circular is submitted hereinbelow: Travel & Conveyance Appellant incurred Rs.11,04,735 on travelling and conveyance of doctors/ professors of high repute who have been hired by the Appellant as consultants to speak! make presentations at the seminars/ conferences conducted by the Appellant on various topics. We wish to mention that these expenses are not violative of MCI regulations for the reasons highlighted herein below: • MCI regulations only covers the expenses incurred for medical professionals who are delegates and not those who act as guest speakers. Relevant portion of the Regulations (enclosed as Annexure 2 to application for admission of additional evidences @ Pg 34-49) states as under: Travel Facilities - A medical practitioner shall not accept any travel facility inside the country or outside, including rail, air. ship, cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc. as a delegate. • Travel and conveyance expense was incurred majorly for doctors. who are on the payroll of Appellant and a declaration from the Appellant confirming the same has been enclosed as Annexure 3 to application for admission of additional evidences @ Pg 50. • Considering the above, Appellant wishes to mention that any expenditure like travel etc incurred on doctors in the capacity of them being employees/ contractual service providers of the Appellant and

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 20 of 49 not 'delegates' would not be violative of MCI regulations and deserves to be allowed as business expenditure. • Even otherwise, Appellant also submits that travelling and accommodation facility is provided to certain doctors under agreement (apart from the employees) are not in the nature of freebies as the same have been incurred for availing the services of the doctors under a contractual obligation/ arrangement MCI regulation itself allows medical practitioners to work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants and in doing so a medical practitioner should adhere to the certain guidelines/ safeguard. MCI regulations does not prohibit medical practitioners from accepting travel costs while acting as speakers/ consultants and providing consultancy services. Hence, CBDT Circular would not be applicable and provisions of section 37 of the Act cannot be invoked. �In addition to the above. it may kindly be appreciated that the Appellant entered into an agreement with such doctors for availing professional! consultancy services under which apart from paying profession fee to such doctors. Appellant is also obliged to incur cost of travelling and accommodation. With regard to such arrangement/ expenses incurred. "it is submitted that such expenses would not come under the ambit of "freebies" as mentioned in IMC Regulations/ CBDT Circular, since such expenses have been incurred based on specific contractual arrangement entered with doctors and not given gratis to medical practitioners which alone is prohibited by IMC Regulations/ CBDT Circular. Even though the term "freebies" has not been defined under the Act, the same can be understood from common parlance as something that is given to another person for gratis without any obligation to incur such expense and without expecting any reciprocal service from the other person. Sample copies of agreements entered with doctors are enclosed as Annexure 4 to application for admission of additional evidences @; Pg 5162. �Considering that the doctors are hired as speaker/ consultant to provide presentations at the seminars/ conference conducted by the Appellant. the travel and accommodation expenses incurred by the Appellant while availing such services of doctors have been incurred in the course of conducting its normal business operations and hence. eligible for deduction under section 37 of the Act. Gifts & donations • Break-up of gifts & donations expense reveals that it includes the following expenses:

IT(TP)A No.2889/Bang/2017 & IT(TP)A No.3376/Bang/2018 M/s. Alcon Laboratories (India) Pvt. Ltd., Bangalore

Page 21 of 49 Conference expense of INR 50,94,395 Publicity and literature expense of INR 22,19,264 and Other marketing expense of INR 38,25,933. • Conference expense includes expenses incurred on meals. accommodation, travel. conveyance. books and literature. sponsorship. audio visual set up hired. etc. On perusal of such details. it may kindly be appreciated that expenses in the nature of meals, accommodation, travel, conveyance, etc. incurred on doctors are covered under the contractual agreement entered with them or are expenses incurred on employee doctors who are otherwise not covered within the prohibitions imposed under the MCI regulations. That apart. expenses in the nature of books, literature, sponsorship, audio visual set up, etc. are not incurred on any doctor in order to promote the Applicant's products. These expenses are incurred in the course of business and cannot be treated as freebies. • Publicity and literature expenses also includes webcast charges. which are not specifically prohibited under the MCI regulations. Sample copy of invoices are enclosed as Annexure 5 to application for admission of additional evidences @ Pg 6364. �In Appellant's own case for A Y 2011-12 (Page 816 to 859 of the paper book) and AY 2012-13 (Page 860 to 881 of the paper book). DRP has directed the learned AO to allow deduction of expenses pertaining to Publicity and Literature. basis the reason that such expenses are not specifically covered by the MCI Regulations (i.e. cannot be categorised as Gift. Travel facility. Hospitality. Cash or Monetary grant) and such expenses are required to be incurred by the Appellant so that the medical practitioners stay abreast of developments on various medicines manufactured/ sold by the Appellant and also the diseases which can be cured by such medicines. �With regard to other marketing expense. we wish to mention that it majorly includes payments to State Chemist and Drug Association in the nature of Product Information Service Charge which is paid in order to publish the information on the Appellant's products and the payment is made based on the standard rates framed by these associations. We wish to submit that the above expenditure is not specifically prohibited in the MCI regulations. Even otherwise, expenses incurred by the assessee would not be hit by the decision of Hon'ble Apex Court in case of M/s Apex Laboratories Pvt. Ltd. v. DCIT (SLP No. 2320712019) which is distinguishable on facts.

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Page 22 of 49 Post issuance of directions dated 27.11.2014 by DRP and during the pendency of the present appeal before the Hon'ble Tribunal, Hon'ble Supreme Court in the case of Apex Laboratories Pvt Ltd. v. DCIT (2022] 135 taxmann.com 286, under the facts of that taxpayer, held freebies/gifts given to doctors to be not allowable under section 37 of the Act. In this case, taxpayer gifted expensive gifts such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners to promote its nutritional health supplement 'Zincovit'. In Appellant's case, the expenditure is towards contractual obligations with some doctors for seeking their services in lieu of remuneration. In fact, in the agreement entered with the doctors. it is specifically mentioned that the latter will not prescribe Astra's products for gaining any business advantage for AstraZeneca (Refer Pg 52, 56, 60 of application for admission of additional evidence). It is settled law that decision of Courts has to be read in context of facts of the case. Expenses incurred in Appellant's case under a contractual obligation for receiving consultancy services of doctors are clearly distinguishable from facts of the case decided by Hon'ble Supreme Court (supra). Expenses incurred by appellant when examined in context would be clearly not in violation of the regulations framed by the Medical Council. Accordingly, it is prayed that the same deserve to be allowed. Ground of appeal no. 7: Without prejudice to the above, Amendment to IMC Regulations are not applicable prior to 10 December 2009 Hon'ble ITAT in Assessee's own case for A Y 2009-10 has held that no disallowances of expenditure incurred by the Assessee on doctors prior to the amendment of IMC regulations i.e. prior to 10 December 2009 can be made (Page 1251 of Legal Paperbook - IV) Assessee submits that the CBDT Circular dated should not be applied retrospectively as the amendment to the IMC Regulations was effective from 10 December 2009. The breakup of expenses are as follows (refer page 1500 of Legal Paperbook Vol 5):

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Pre Post Particulars Total Amendment Amendment Travel Conveyance provided and doctors 7,64,447 3,40,288 11,04,735 Conference & Sympos and other marketing expenses 14,16,528 75,03,799 89,20,327 Publicity and 8,54,977 13,64,286 22,19,263 Total 30,35,953 92,08,373 1,22,44,3

Reliance in this regard is placed on the below decisions: • ACIT vs M/s. Geno Pharmaceuticals Limited (ITA No. 12/P J120 14) (Page 1088 of the Legal Paperbook - III) • State of Bombay vs Vishnu Ramachandra (AI R 1961 SC 307) (Page 1094 of Legal Paperbook - Ill) • Ritesh Aggarwal and Others vs SEBJ and Oth rs (2008 8 SCC

205) (Page 1108 of Legal Paperbook - III) •CJ Paul and Others vs District Collector and Others (2009 14 SCC 564) (Page 1117 of Legal Paperbook - III)

That apart. even if expenses incurred by the assessee during pre- amendment are directed to allowed. the expenses incurred post amendment would include expenses which are otherwise not violative of MCI Regulation as also CBDT circular for reasons already explained herein above. Therefore. same may kindly be directed to be allowed a deduction after examination by Ld. AO. In this regard. it is respectfully prayed that the issue of disallowance of expenditure incurred on doctors may kindly be restored to the file of assessing officer for fresh examination / verification.”

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Page 24 of 49 a)Hon'ble High Court of Madhya Pradesh in the case of CIT v. Kum. Satya Setia (143 ITR 486), has held that under rule 29 of the Rules, it was within the discretion of the Tribunal to allow the production of additional evidence and even if there was a failure to produce the documents before the Income-tax Officer and the Appellate Assistant Commissioner, the Tribunal had the jurisdiction in the interest of justice to allow the production of such vital documents. b)The Bangalore Tribunal in case of Tim ken Engineering & Research India (P.) Ltd v DCIT (ITA No. 974/ Bang/2008) relied on the above- mentioned decision. c)In the case of Abhay Kumar Shroff v ITO (63 ITO 144), the Hon'ble ITAT of Patna has held as follows: "Tribunal Rules, 1963 discussed hereinbefore briefly. What I want to emphasize is that if the documents sought to be admitted even at the second appellate stage are of a nature and qualitatively such that they render assistance to the Tribunal in passing orders or required to be admitted for any other substantial cause, it would rather be the duty of the Tribunal to admit them. Learned Judicial Member has rightly made reference to the Tribunal's decision in Rajmoti Industries' case (supra) wherein on an analysis of various decisions, it was held that is the receipt or admission of additional evidence was vital and essential for the purpose of consideration of the subject-matter of appeal and arrive at a final and ultimate decision, the Tribunal was amply empowered to admit additional evidence under rule 29 referred to supra." (emphasis supplied). The Hon'ble ITAT of Delhi in the case of Sikander Publishing (P) Ltd vs DCIT (81 TTJ 249), held that, if the evidence is genuine, reliable and proves the assessee's case, then the assessee is not to be denied the opportunity to produce the same before the appellate authority, as an additional evidence.”

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Page 25 of 49 19. We have heard rival submissions and perused the material on record. The assessee has filed additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 for admission of additional evidence. The additional evidence is details of break-up of expenses, such as travelling, conveyance, gift and donations provided to Doctors aggregating to Rs.1,22,44,326. It was stated that though the assessee had submitted before the lower authorities such details, were not segregated under various heads. It is pertinent to note that prior to the judgment of the Hon’ble Apex Court in the case of M/s. Apex Laboratories Pvt. Ltd. v. DCIT (supra), many of the judicial pronouncements had held that MCI Regulations are not applicable on pharmaceutical companies and expenses incurred by such companies are not violative of CBDT Circular. During this phase of assessment, there were only adhoc summary basis evaluation of expenditure. In the present case also there is no critical evaluation of the expenses and post the Hon’ble Supreme Court judgment, the dictum laid down, same needs to be followed and each of the expenditure needs to be evaluated to see if the disallowance is justified. It is also important to note that for the assessment year 2016-2017, the A.O. had raised query in relation to the expenditure incurred on the Doctors by the assessee. The assessee filed detailed response to such notice and the A.O. after analyzing the nature of expenses (which is claimed by the assessee similar to the expenditure incurred for the relevant assessment year) in the context of MCI Guidelines and CBDT Circular No.5/2012 dated 01.08.2012 accepted the claim of the assessee. Copy of the order in assessee’s own case for assessment year 2016- 2017, is placed on record as additional evidence. Therefore, it was claimed that even if the criteria as laid down in CBDT Circular and also the MCI Regulation (as now affirmed by the Hon’ble Apex Court is applied), the expenditure incurred towards contractual obligation with Doctors and employees of pharmaceutical companies does not call for disallowance. In the present case, the A.O. had primarily made disallowance by referring the CBDT Circular No.5/2012 dated 01.08.2012. The A.O. has not critically examined the nature of expenditure incurred by the assessee. In the larger interest of justice, in view of the latest judgment of the Hon’ble Apex Court, which has examined the very same issue, it becomes necessary to examine the exact nature of expenses incurred by the assessee for Doctors from all angles. Therefore, for substantial question and cause, the additional evidence are taken on record. Since the additional evidence is taken on record, necessarily, the matter needs fresh verification by the A.O., especially in the light of the recent judgment of the Hon’ble Supreme Court in the case of M/s. Apex Laboratories Pvt. Ltd. v. DCIT (supra). For the aforesaid purpose, the issues raised in grounds 4 to 8 are allowed for statistical purposes. It is ordered accordingly.”

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Page 26 of 49 the judgement of Hon’ble Supreme Court in the case of M/s. Apex Laboratories Pvt. Ltd. Vs. Deputy Commissioner of Income-tax cited (supra).

“Grounds relating to adjustment in respect of IT support services 14. The learned AO TPO and the Hon'ble DRP have erred, in law and in facts, by making an addition of Rs.1.78.45,766 to the total income of the Appellant, by disregarding the economic analysis undertaken by the Appellant in the TP documentation and conducted a fresh search to arrive at the arm's length price ('ALP') for the IT support services transaction. Further. the ALP was determined by using incorrect comparable companies engaged in end-to-end software development services. 15. The learned AO / TPO and the Hon'ble DRP have erred, in law and in facts, by applying only the lower cap on the turnover filter of Rs.1 crore and not applying any upper cap for the comparability criterion: 16. The learned AO / TPO and the Hon'ble DRP have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e.. companies having accounting year other than 31 March or companies whose financial statements were for a period other than 12 months); 17. The learned AO / TPO and the Hon'ble DRP have erred, in law and in facts. in accepting companies without appreciating that such companies engaged in providing end-to-end software development services and are not functionally comparable to the Appellant, providing IT support services: 18. Without prejudice to the above grounds, the learned AO / TPO and the Hon’ble DRP have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant in the TP documentation as not comparable:

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Page 27 of 49 19. Without prejudice to the above grounds, the learned AO / TPO and the Hon'ble DRP have erred in law and in facts, by using employee cost greater than 25% of the total revenues as a comparability criterion: 20. Without prejudice to the above grounds. the learned AO / TPO and the Hon'ble DRP have erred in law and in facts, by rejecting certain comparable companies identified by the Appellant using export earnings greater than 75% of the total revenues as a comparability criterion: 21. The learned AO / TPO and the Hon'ble DRP have erred, in law and in facts, by determining the arm's length margin/ price using only FY 2013-14 data: 22. The learned AO / TPO and the Hon'ble DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable”

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Page 28 of 49 b) Infosys offers digital services such as cloud. big data, mobility and functional areas such as HR and Commerce are the focus areas for the products and solutions. c) Product offerings by Infosys pertain to various niche and emerging technologies (Pg no. 10 of AR) d) Infosys is deriving revenue from sale of products and services. Segmental data for products and services is not available e) Infosys brand is a key intangible asset of the company f) Infosys has spent INR 88 crores in brand building. g) As per the report of Brand Finance, the brand value of Infosys was USD 3414 million and USD 2291 million in 2015 and 2014 respectively h) The total R&D expenditure for the year ended 2014 is Rs.873 crores which accounts for 2% of revenue g) The turnover of Infosys is INR 44,341 Cores, which is much higher when compared to the Assessee’s turnover of INR 24.26 cores.

8.1.1 In this regard, the ld. AR relied on the following judgements in support of his arguments: Functionally different a) ARM Embedded Technologies Pvt. Ltd. [IT(TP)A No.3374/Bang/2018 for AY 2014-15] b) Salesforce.com India Private Limited [IT(TP)A No 3286/Bang/2018 for AY 2014-15] c) Microsoft Research Lab India Pvt. Ltd. [IT(TP)A No. 3131/Bang/2018 for AY 2014-15] d) EMC Software and Services India Pvt. Ltd.[IT(TP)A. No.3375/Bang/2018 for AY 2014-15] e) LSI India Research & Development Pvt. Ltd [IT(TP)A No.3170/Bang/2018 ] f) Hewlett Packard (India) Software Operation Pvt Ltd [ITA No. 3400/Bang/2018]

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Page 29 of 49 g) Hewlett Packard (India) Software Operation Pvt. Ltd. (ITA No.3400/Bang/2018) Turnover a) Zynga Game Network India Pvt. Ltd. (ITA No.2573/Bang/2019)

Ld. DR’s submissions:- 8.2. On the other hand, the Ld. D.R. stated that on perusal of the annual report of the company, Ld. DRP noted that this company is engaged in providing IT technology services comprising Application Outsourcing, Infrastructure Management, Independent validation, Business service management, consulting and systems integration services. The service delivery is through various platforms and solutions such as Infosys IT Service Management Platform, Infosys Agile and Vscrum Methodology, Infosys command centre frame work, Infosys cloud and co-system hub, Infosys Big-data edge. (Ref. Executive Vice Chairman message in the annual report) As per the management report these accelerated and agile service delivery has enabled the company for better project execution, cost-reduction 'and enhanced business value. The company provides end to end solutions, to the clients through the various platforms / products or solutions. These platforms / products and solutions are not off the shell products as argued by the assessee. It is also noted by the Ld. DRP that as per the P&L account, the company has revenue from software services of Rs.42,531/- crores and from software products of Rs.18,101/- crores, and that the product revenue constitute meagre 4.08% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company in predominately having revenue from software services, Ld. DRP

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was of the considered view that this company can be considered as functionally comparable to the assessee.

8.2.1. Ld. D.R. stated that the Ld. A.R. also pleaded before the Ld. DRP that this company witnessed high growth during the year and has to be excluded. However, the assessee failed to point out any information in the TP report to indicate any abnormal event leading to high growth. The growth is on account of business dynamics. Therefore, the pleas are rejected by the Ld. DRP.

8.2.2 It was also pleaded by the Ld. AR before Ld. DRP that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report (the messages of Executive Vice Chairman, Senior Vice President, whole time director in the annual report) by Ld. DRP shown that the growth in revenue was on account of various business initiatives taken to accelerate growth such as implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, etc. Thus, the growth in revenue is not on account of its brand or any exceptional event, and hence cannot be a reason for rejecting this company, which is otherwise found to be functionally comparable.

8.2.3 The Ld. D.R. stated that the perusal of the details in the annual report by the Ld. DRP shown that the company has incurred R & D expenditure to the tune of Rs.873 crores, which constitute

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meagre 1.96% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It is further seen by the Ld. DRP that the value of generally acceptable intangible assets declared in the Asset schedule was Rs.13 crores. Further as per note 1.1 of the annual report, at page 50, software product developments costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software. Such a development is not reflected in the Asset schedule. Thus, Ld. DRP inferred that the development of intangibles and its impact on the revenue and profitability is meagre. Further, the assessee has failed to establish that such differences, if any, on account of R&D, brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub- rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas were rejected by the Ld. DRP. In view of the above, Ld. DRP upheld M/s. Infosys Ltd. as comparable to the assessee’s company. (b) L&T Infotech Ltd. Ld. A.R’s submissions: 8.3 Further, with regard to exclusion of L&T Infotech Ltd., the Ld. A.R. stated that this company is functionally different due to following reasons: a) The company is engaged in provision of wide range of services to Banking, Financial services, Insurance, Media & Entertainment, Travel, Logistics and Healthcare sectors.

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Page 32 of 49 b) The company is engaged in trading of goods which is apparent from “cost of bought-out items for resale”. c) The company is specifically engaged in building brand image. The company has earned various awards and Recognitions whereas the Assessee does not involve nor has any brand image like that of L&T. d) The company owns huge intangibles. e) The turnover of L&T Infotech is INR 4643.94 Crores, which is much higher when compared to the assessee’s turnover of INR 24.26 crores. f) The product engineering services business has been transferred to L&T Technology Services Ltd. w.e.f. 1.1.2014 which clearly have an impact on revenues which in turn effects the margin of the company. 8.3.1 In this regard, the ld. AR relied on the following judgements in support of his arguments: Functionally different a) ARM Embedded Technologies Pvt. Ltd. [IT(TP)A No.3374/Bang/2018 for AY 2014-15] b) Salesforce.com India Private Limited [IT(TP)A No 3286/Bang/2018 for AY 2014-15] c) Microsoft Research Lab India Pvt. Ltd. [IT(TP)A No. 3131/Bang/2018 for AY 2014-15] d) EMC Software and Services India Pvt. Ltd.[IT(TP)A. No.3375/Bang/2018 for AY 2014-15] e) LSI India Research & Development Pvt. Ltd [IT(TP)A No.3170/Bang/2018 ] f) Hewlett Packard (India) Software Operation Pvt Ltd [ITA No. 3400/Bang/2018] g) M/s. Alcon Laboratories (India) Pvt. Ltd vs DCIT IT(TP)A No. 726/Bang/2017 Turnover a) Zynga Game Network India Private Limited [ITA No. 2573/Bang/2019 for AY 2015-16] b) Lam Research (India) Private Limited [IT(TP)A No 2490/Bang/2017 for AY 2013-14]

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Ld. D.R’s submissions: 8.4. On the other hand, the Ld. D.R. submitted that on perusal of the annual report by Ld. DRP it clearly shown that the entire revenue is from provision of services. As per Note 2, revenue is recognised when services are rendered and related costs incurred. There is no reference to any product sale or inventory in the financial statements. As there is no revenue stream on account of product sales, Ld. DRP did not find any merit in the argument that the company is engaged in product sales. On the pleas as to presence of brand, Ld. DRP noted that, there is no specific information in the financial statements to indicate that the brand has contributed to revenue growth of the company. On the other hand, the reference in the annual report only mentions that the company's cost-effective and agility in contributing value to clients have strengthened its brand. There is no information that the brand has impacted the revenue of the company. The intangibles referred in the Asset Schedule represent the computer software, and business rights and as such does not refer to any IPR owned by the said company during the year. Certain developments are under way which has not crystallized into an intangible to be a source of revenue. Thus, the assessee has failed to establish that such differences, if any, on account of IPR, brand or intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such

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transactions in the open market. Hence, these pleas were rejected by the Ld. DRP.

8.4.1 It was also pleaded that this company is engaged in trading of goods, with reference to a debit, 'cost of bought out items for resale' in the profit and loss account. However, careful perusal of the entries in the P&L A/c would show that the software expenses incurred were classified into two categories - 'software packages used for own use'- referring to the packages installed in the assessee's systems for running its activity; and 'bought out items for resale'-referring to the items used in the software development of the customers. This do not in any way indicate that this company is engaged in trading activity. Accordingly, this plea is rejected.

8.4.2 Further, it is seen that this company was held to be engaged in software development and not a product company and hence, functionally comparable to a software service provider company, by the Bangalore Tribunal in the case of M/s. Advice America Software Development Centre Private Limited (in I T A (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of M/s. L&T Infotech Ltd. as a comparable. (c) Persistent Ltd. Ld. A.R’s submissions: 8.5 Further, with regard to exclusion of Persistent Systems Ltd., the Ld. A.R. stated that this company may be excluded from the list of comparables due to following reasons: a) Persistent specializes in building computer software products. Persistent’s business is organized with a focus on three areas:

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Products (IP Business), Platforms (Solutions Integration) and Services (Product Engineering). b) The company is a global company specializing in software products, services and technology innovation c) Persistent is a leader in outsourced product development and works with world’s largest software product companies. d) Persistent is also engaged in business of sale of software products and there is no revenue e) Persistent is also engaged in business of sale of software products and there is no revenue break-up in the annual report in relation to the various products and services. f) The company has huge intangibles. g) The company also incurs expenditure on in-house research and development centre. h) The turnover of Persistent is INR 1184.12 crores, which is much higher when compared to the Assessee’s turnover of INR 24.26 crores. 8.5.1 In this regard, the ld. AR relied on the following judgements in support of his arguments: Functionally different ARM Embedded Technologies Pvt. Ltd. Vs. ITO (IT(TP)A a) No.3374/I3ang/2018 for AY 2014-15) Salesforce.com India Private Limited [IT(TP)A No 3286/Bang/2018 for AY b) 2014-15] Microsoft Research Lab India Pvt. Ltd. Vs. DCIT [IT(TP)A No. c) 3131/Bang/2018 for AY 2014-15] EMC Software and Services India Pvt. Ltd.[IT(TP)A. d) No.3375/Bang/2018 for AY 2014-15] LSI India Research & Development Pvt. Ltd [IT(TP)A e) No.3170/Bang/2018 ] Hewlett Packard (India) Software Operation Pvt Ltd [ITA No. f) 3400/Bang/2018] M/s. Alcon Laboratories (India) Pvt. Ltd vs DCIT IT(TP)A No. g) 726/Bang/2017

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Page 36 of 49 Turnover a) Zynga Game Network India Private Limited [ITA No. 2573/Bang/2019 for AY 2015-16] b) Lam Research (India) Private Limited [IT(TP)A No 2490/Bang/2017 for AY 2013-14]

Ld. DR’s submissions: 8.6 On the other hand, the Ld. D.R. stated that on perusal of the annual report by the Ld. DRP, the Ld. DRP noted that at page 158 of the unconsolidated annual report, it is mentioned that the activities of the company do, not involve purchase of inventory and sale of goods, and its nature of business was rendering of services. As per page 164 of the Annual Report, the company is specializing in software products services and technology innovation and offers complete product life cycle services. As per page 181, Note 21 of the Annual Report, the revenue from operations is stated to be on account of sale of software services amounting Rs.11,841.16 million. At page 183 of the Annual Report, it is given that the company's operations predominantly relate to providing software products services and technology innovation covering fall life cycle of products to its customers. The primary reporting segments are identified based on review of market and business dynamics bard on risk and returns affected by the type of class of customers for the services provided. As per page 195 of the annual report, the earnings in foreign currency of Rs.10,606.23 million, (constituting 89.57%) was from sale of software; and there is no reference to sale of products. Thus, it is evident that this company's revenue from operation was predominantly on account of services rendered. There is no mention of any revenue stream from sale of products in the P& L account or balance sheet.

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8.6.1 The Ld. D.R. further stated that the references to product transaction relied by the assessee's AR before Ld. DRP was in the context of the consolidated results of the company and management discussion. As per the consolidated balance sheet, there is information to show that there was acquisition of intangible rights during the year 2012-13 (refer annual report for F.Y 2012-13), which has contributed to IP driven revenue. No such acquisition or addition to intangible assets are seen in the stand alone Asset Schedule of this Indian company, which is being compared, for this year or in the earlier year.

8.6.2 The Ld. DRP reproduced the extracts of annual report in his order for F.Y. 2012-13 which is also relevant for consideration:-

At page 88 it was stated that the increase of intangible block of assets during the year (2012-13), of Rs.262.84 million, was mainly on account of acquisition of various IPs during the year and the same is shown in the intangible Asset Schedule of the consolidated financial statement at page115 as under:

(Intangible assets of Group 2012-13)

(In Software Acquired Total contractual rights Gross block (At Cost) 1 569 .1 2 As at April 1. 2012 1.287 49 261.63 Additions 94.03 261 23 355.26 Disposals 116.10 116.10 Other adjustments • Exchange differences 23416 in 18) 23.68 -542.68 1,289.28 As at March 31, 2013 1.831.96

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The intangible Asset Schedule of the Indian company, as per the standalone financial statement at page 160, shows the following position:

(Intangible assets of Indian Company 2012-13)

(In Million) Software Acquired Total contractual rights Gross block (At cost) 232 54 1,160.75 928.21 As at April 1. 2012 90.90 "- Additions 90.90 116 10 116.10 Disposals 232.54 As at March 31, 2013 903.01 1,135.55

8.6.3 Ld. DRP observed that there is no change in the Asset position of the Indian Company for this year. These information clearly suggest that the IP driven revenue does not pertain to the India Company. Thus, it can be inferred that this company is predominantly into sale of software services and functionally comparable to the assessee.

8.6.4 Besides, the Ld. DRP observed that it is pertinent to note, that the TPO gathered certain clarification from this company u/s 133(6) of the IT, and. in response this company has clarified, 'that it is predominantly engaged in the business of rendering software development services across its business segments Telecom & wireless, Life science and Health care, Infrastructure & systems'. As to the query on IP led business activity, it clarified that, 'the overseas subsidiary companies of Persistent group have acquired certain Intellectual property products and generating some revenue from licensing and support of these products. The Indian company PSL India is predominantly engaged in the business of rendering software development services, the revenue

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reported is primarily on account of rendering of software development services only'.

8.6.5 In the light of these clarifications, Ld. DRP has not hesitated in upholding this company as functionally comparable to the assessee's software development activity.

8.6.6 The Ld. D.R. stated that the Ld. DRP observed that the expenditure incurred towards R&D as per page 195 of the annual report was Rs.39.61 million, which constitute meagre 0.33% of operating revenue. The value of intangible assets was only Rs.162.85 million constituting 1.36% of operating revenue. There is no reference to any intangible assets or patent owned or developed by the company, in the stand-alone annual report. There is also no acquisition of intangibles during the year. Further as per note in of the annual report, software product developments costs are expensed as incurred unless the technical and commercial feasibility of-the project enable to use or sell the software, they are not capitalized. Such a development is not reflected in the Asset schedule. Thus, Ld. DRP inferred that the R&D and intangible assets do not have impact on the revenue and profitability of the company. We also note that, the assessee has failed to establish that such differences, if any, on account of R&D, brand and IRPs have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such

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transactions in the open market. The said company also clarified u/s 133(6) that its intangible assets are in the nature of software licenses acquired for use in the operation of the company and are not in the nature of inbuilt software product generating revenue for the company. Hence, these pleas were rejected by the Ld. DRP.

8.6.7 Further, Ld. DR stated that the Ld. DRP stated in his order that this company was held to be engaged in software development and not a product company and hence functionally comparable to a software service provider company, by the Bangalore Tribunal in the case of M/s. Advice America Software Development Centre Pvt. Ltd. (in ITA (TP) No.2531/Bang/2017 dated 23.5.2018 relating to AY 2013- 14). In view of the above, Ld. DRP upheld the selection of M/s. Persistent Systems Ltd. as a comparable. (d) Thirdware Solutions Ltd. Ld. A.R’s submissions: 8.7 Further, with regard to exclusion of Thirdware Solutions Ltd., the Ld. A.R. stated that this company may be excluded from the list of comparables due to following reasons: a) Thirdware is engaged in sale of products which is evident from the disclosure of the same on face of statement of profit and loss. b) There are subscription contracts which are entered into by Thirdware, impact of which is not known as no break-up of the same is available. The company earns revenues from sale of software licenses by delivering the software license key, which further substantiates it to be a product company. c) No segmental information available.

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d) Thirdware provides world class solutions in the form of products, making it functionally different form the assessee who is involved in sale of services alone. e) The turnover of Thirdware is INR 206.76 crores, which is much higher when compared to the Assessee’s turnover of INR 24.26 crores. 8.7.1 In this regard, the ld. AR relied on the following judgements in support of his arguments: Functionally different a) ARM Embedded Technologies Pvt. Ltd. Vs. ITO (IT(TP)A No.3374/Bang/2018 for AY 2014-15) b) Salesforce.com India Private Limited [IT(TP)A No 3286/Bang/2018 for AY 2014-15] c) Microsoft Research Lab India Pvt. Ltd. Vs. DCIT [IT(TP)A No. 3131/Bang/2018 for AY 2014-15] d) EMC Software and Services India Pvt. Ltd.[IT(TP)A. No.3375/Bang/2018 for AY 2014-15] LSI India Research & Development Pvt. Ltd [IT(TP)A e) No.3170/Bang/2018] f) Hewlett Packard (India) Software Operation Pvt. Ltd. [ITA No.3400/Bang/2018]

Ld. D.R’s submissions:

8.8 On the other hand, the Ld. D.R. submitted that on perusal of the annual report by the Ld. DRP, the Ld. DRP noted that the company is engaged in the business of software development and consultancy service. (page 16 of Balance Sheet), and that the company's operation comprises of software, development, implementation and support services. At page 13 of the annual report, the company's Revenue Recognition 'disclosure refers to revenue from services from software development and implementation.

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8.8.1 The Ld. DRP further observed that though at page 2 of the P&L A/c statement the company has mentioned revenue from sale of products at Rs.20675/- lakhs, in the foot note given at para-A, it is clearly mentioned that the revenue was on account of export of software services to the tune of Rs.20,194.37 lakhs, from software services Rs.414.07 lakhs, from subscription and training Rs.59.32 lakhs, from sale of licenses 7.98 lakhs. The revenue from software licence constitutes meagre 0.03% of total operating revenue. Thus, it is very clear that this company is predominantly into sale of software services and hence can be safely taken as a comparable.

8.8.2 The Ld. D.R. further stated that besides at page 7 of annual report, Ld. DRP observed that the company has acquired intangible asset relating to software purchased for company's internal use which was capitalized as the cost of acquisition. There is no information in the annual report to indicate that this company owns or developed IPRs. Thus, intangible assets have no impact on the profits of the company. Thus, Ld. DRP noted that in all aspects this company can be considered as comparable to the assessee company. Ld. DRP also noted that the assessee failed to establish that such differences, if any, on account of R&D/intangibles have material effect on the margin of .the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such

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transactions-in the open market. Hence, selection of M/s. Thirdware Solutions Ltd. as a comparable was upheld by the Ld. DRP.

8.9 After hearing both the parties, we are of the opinion that these comparables have been considered by the Tribunal in the case of M/s. ARM Embedded Technologies Pvt. Ltd. Vs. ITO in IT(TP)A No.3374/Bang/2018 dated 24.11.2020 wherein held as under:- 8. We heard the rival contentions and perused the material on record. The assessee has adopted TNMM and determined the PLI i.e. OP/OC @ 15.04%. The Ld AR submitted that (i) Infosys Ltd. (ii) Persistent Systems Limited, (iii) L & T Infotech Limited and (iv) Thirdware Solutions Ltd. are to be excluded on the turnover criteria and supported her submissions, relying on the catena of judicial decisions. We find,

i) Infosys Technologies Ltd. - The Company is not functionally comparable as it has diversified operations and no segmental data is available, and does end to end business solutions like business consulting, technology, engineering and outsourcing services. Further, Lack of segmental details in respect of services and investment in products and focuses on immense brand building. The company owns significant brand value, significant amount of IPR and brand value, and involved in R & D activities and incurred significant expenditure. During the year the company has amalgamated its wholly owned subsidiary Infosys Consulting India Ltd. For the A.Y.2014-15, the company was excluded as comparable by the co-ordinate Bench of Tribunal in the case of M/S EMC Software and Services India Pvt. Ltd. Vs. JCIT in IT(TP)A No.833/Bang/2018 dt.18.12.2019 [115 taxmann.com 293 (Bang)] at para 6(i) as under :

“ 6 (i) Infosys Limited : This company is functionally dissimilar and provides end to end business solutions like business consulting technology engineering and outsourcing services and no segmental details in respect of services are available and made investments and products to establish as a tradable IPO owner. Further the comparable owns significant brand value products and focus on brand building and incurred expenditure on R & D. The company owns 7 edge products / platforms and six other product based solutions. The company leverages on its premium banking solution and during the year the company merged with its wholly owned subsidiary Infosys Consulting India Limited. We found that the company was excluded from the final list of comparables in assessee's own case for the Assessment Year 2011-12 by the DRP and revenue has accepted. The learned Authorised Representative supported his arguments relying on the

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Page 44 of 49 decisions in the case of CIT Vs. Agnity (India) Technologies Pvt. Ltd. (2013); CGI Systems and Management Ltd. Vs. ACIT (2015) 94 taxman.com The learned Authorised Representative also substantiated that for the Assessment Year 2014- 15, the co-ordinate Bench of the Tribunal in the case of LG Soft India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 Dt.28.5.2019. We support our views relying on the LG Soft India Pvt. Ltd. Vs. DCIT (supra) where the Tribunal has observed at paras 6 and 6.1 as under :

“6. We notice that the co-ordinate bench has excluded M/s. Infosys Ltd in A.Y 2008-09 by following the decision rendered by another co- ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd. (ITA No.1054/Bang/2011) was followed and it was held that M/s. Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break up of revenue from software services and software product is not available.

6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 2008- 09, we direct exclusion of M/s. Infosys Ltd.”

We found that the Infosys Ltd. has significant intangibles and huge revenues from software products and was considered by the co-ordinate Bench of the Tribunal for exclusion in the Assessment Year 2014-15. Accordingly, we direct the TPO to exclude the Infosys Ltd. from the final list of comparables for determination of ALP.” In the present case also, we find that the comparable has significant intangibles, and therefore, we direct the TPO to exclude Infosys Technologies Ltd. from the final list of comparables in determination of ALP.

ii) L & T Infotech Limited - The company is not functionally comparable, as it has high brand value and market leader and also benefit from its parent brand. It has proprietary business and during the year extraordinary events like product engineering services business of the company was transferred to its subsidiary and has incurred expenses in foreign currency being 57.13% of its total expenditure. The company was excluded as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 6(ii) at page 592 & 593 of Paper Book as under : “ 6 (ii) L & T Infotech Limited : The company has a margin of 24.61% and has high brand value and is a market leader, high presence and the intangible income in proprietary products. Significant expenditure in foreign currency to the extent of 57.13%. During the year the product engineering business service of the company

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Page 45 of 49 was transferred to its subsidiary. The company segments are divided into service cluster, industrial cluster and telecom business. As per the Annual Report of the company, the company has a significant capital work-in-progress and the company has developmental products. The comparable was excluded from the final list of comparable in assessee's own case for the Assessment Year 2011-12 by the DRP and further the comparable company was excluded by the co-ordinate Bench of Delhi Tribunal in the case of Pitney Bowes Software India Pvt. Ltd. Vs. ACIT 101 Taxman.com 350. The learned Authorised Representative also relied on CGI Information Systems & Management Consultants (P) Ltd. Vs. ACIT (2018) 94 taxman.com 97 and DCIT Vs. Taxman India Pvt. Ltd. (2016) 74 Taxmann.com 88 (Del). We found that the co-ordinate Bench of Tribunal in M.P. No.95/Bang/2019 in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 has dealt on the issue at page 2 para 4 as under : “ 4. We heard Ld D.R and perused the record. We find merit in the miscellaneous petition filed by the assessee. Accordingly following paragraph is inserted after paragraph 10 in the impugned order of the Tribunal, which will adjudicate the issue relating to “L & T Infotech Ltd”:-

“10A The assessee has sought exclusion of M/s L & T Infotech Ltd on the ground that there were extraordinary events during the year, it possesses brand and intangibles, it has not provided segmental information and it has got subcontracting expenses. The Ld A.R submitted that the above said company has been excluded by the co-ordinate bench in the case of Metric Stream Infotech P Ltd (IT(TP)A No.1418 & 2735/Bang/2017) relating to AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (IT(TP)A No.1506/Bang/2016 relating to AY 2011-12). The Ld A.R submitted that there is no change in facts in this year also and accordingly prayed for exclusion of the above said company. 10A.1 We heard Ld D.R and perused the record. We notice that M/s L & T Infotech Ltd has been excluded by the co-ordinate bench in the case of Metric Stream Infotech P Ltd (supra) for AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (supra) for AY 2011-12. The Ld A.R submits that there is no change in facts prevailing in the current year vis- a-vis the years considered by the co-ordinate benches in the above said cases. Accordingly, following the above said decisions, we direct exclusion of M/s L & T Infotech Ltd.” We considering the functional dissimilarity and judicial decisions and various facts which are not similar to the assessee functional profile, Accordingly, we direct the TPO to exclude M/s. L & T Infotech Limited from the final list of comparable in determining the ALP.

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Page 46 of 49 iii) Persistent Systems Ltd. - The company is not functionally comparable as it has diverse business operations including IP led business, extraordinary events and is engaged in R & D activities and large scale of operations. The company was excluded as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 6(iii) pages 593 of Paper Book as under : “ 6 (iii) Persistent Systems Ltd. : The company is functionally different as it is engaged in rendering IT services and in the development of software products without there being support segmental information and engaged in IP led solutions and undertakes significant R & D activities, owns IP. During the year the company made acquisitions. The company has made significant investment in IP and their solutions and has a dedicated team for Research and IP development. The learned Authorised Representative relied on decision of Tribunal in the case of CGI Information & Management Systems Pvt. Ltd. Vs. ACIT 94 Taxman.com 97 and PCIT Vs. Saxo India Pvt. Ltd. 74 taxmann.com 88 (Delhi). We relied on the decision of CGI Information Systems & Management Consultants Pvt. Ltd. (supra) at paras 28 to 30 as under :

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We rely on judicial decisions and facts in respect of comparable Persistent Systems Ltd. and direct the Assessing Officer to exclude from the final list of comparable for determination of ALP.”

We found there is a functional dissimilarity in comparison to assessee financial profile and accordingly, we direct the TPO to exclude the comparable from the final list for determination of ALP.

iv) Third ware Solutions Ltd. - The company is not functionally comparable as it has different diversified activities, and derives income from software development, income from subscription contract and from sale of user licenses. Further, no

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Page 48 of 49 segmental details are available and has diverse services and also error in computation of margins. The company was excluded as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 6(iv) pages 594 & 595 of Paper Book as under :

“ 6 (iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 dt.28.05.2019 for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 & 8.1 at page 4 as under :

“8. We also notice that in A.Y 2008-09, the co-ordinate bench has excluded M/s. Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s. Thirdware Solutions Ltd. is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available.

8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 200809, we direct exclusion of M/s. Thirdware Solutions Ltd.”

The comparable Thirdware Solutions Ltd. has to be excluded as it is predominant in activity and segmental details are not available. Accordingly we direct the TPO/A.O to exclude this comparable from the list of comparables for determining the ALP.”

We found there is a functional dissimilarity in respect of assessee's financial profile and accordingly, we direct the TPO to exclude the comparable from the final list for determination of ALP.”

8.9.1 In view of the above decision of the Tribunal in the case of M/s. ARM Embedded Technologies Pvt. Ltd. Vs. ITO in IT(TP)A No.3374/Bang/2018 dated 24.11.2020 cited (supra), taking a

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Page 49 of 49 consistent view, we direct the AO/TPO to exclude M/s. Infosys Ltd., M/s. L&T Infotech Ltd., M/s. Persistent Systems Ltd. and M/s. Thirdware Solutions Ltd. from the lists of comparables and to recompute the ALP of international transactions with A.E. Ordered accordingly.

Order pronounced in the open court on 16th Nov, 2022.

Sd/- Sd/- (N.V. Vasudevan) (Chandra Poojari) Vice President Accountant Member

Bangalore, Dated 16th Nov, 2022. VG/SPS

Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order

Asst. Registrar, ITAT, Bangalore.